Nobody invests in rental property because it’s fun. People invest their hard-earned money into real estate because of the potential for generating a significant return on investment (ROI). But if you aren’t getting a solid ROI, it may be time to act.
Calculating Your Cash Flow
In the simplest terms, cash flow is the difference between the income you make on a property and the expenses you pay (including mortgage debt). A property is said to have a positive cash flow when the income is larger than the expenses. Likewise, a property has negative cash flow when there are more expenses than income.
The actual process of calculating cash flow is as follows:
- Calculate the gross income for the property
- Subtract all expenses related to the property
- Subtract any debt, tax, and interest payments (if not already accounted for)
- The resulting figure is your property’s cash flow
“Most real estate investors aim at owning rental property with positive cash flow,” investor Liz Brumer writes. “The more cash flow a property has, the better the return and the more income the real estate investor earns. Having higher cash flow also provides the landlord with a safety net for when unexpected expenses arise like a burst pipe, roof replacement, or new A/C or furnace.”
As cash flow increases, so does flexibility. Over time, cash flow naturally rises as rental rates increase and mortgage balances get paid off or refinanced. This money can either be used to fund your own lifestyle expenses or to grow your rental portfolio one property at a time.
4 Ways to Improve Cash Flow
Discerning landlords are constantly looking for ways to improve cash flow. And while it’s easier in some markets than in others, here are a few tips you can use:
Run a Rental Rate Analysis
It’s possible that you’re charging a lower rental rate than you could be charging. Today’s market is white-hot, which means if you’ve had tenants in your property for more than a year or two, you could likely charge significantly more.
The only way to know how much you could be charging is to get a rent estimate. By analyzing your property and comparing it against other similar properties in the neighborhood, you can figure out what a reasonable rate is. Even if it’s just a 5 to 10 percent increase, the additional income could significantly impact your cash flow.
Amenities and Upgrades
If you’re already at the upper limit of a fair market rental rate, you’ll have to look for other ways to increase cash flow. One option is to invest in additional amenities or upgrades. Examples include:
- Cosmetic renovation of the kitchen and/or master bathroom
- Addition of a 70-inch 4K TV that comes with the property
- Improved landscaping and/or the addition of outdoor living
- Complimentary internet and streaming entertainment services
It doesn’t matter how small the upgrade is. A 70-inch TV, for example, might only cost you $600. But this shiny object could allow you to effectively increase rent by $50 per month. That gives you a break-even point of one year. After that, it’s all profit.
Lease Agreement Add-Ons
Carefully think about your property and look for opportunities to incorporate add-ons and additional fees.
Pet rent is a great place to start. Typically, fees are charged monthly. For example, you may charge an additional $25 per month for dogs and cats. On top of that, you can require a $200 non-refundable deposit for the additional cleaning that will be required when the tenant moves out.
Other add-ons could include a charge for parking (if you live in the city where separate parking leases are common), fees for additional storage space, or onsite laundry machines (good for multi-family housing).
Another option is to refinance your mortgage. If it’s been several years since you bought the property, it’s possible that a combination of lower interest rates, increased equity, and a better credit score could help you refinance into a more favorable loan position. In some cases, this could improve cash flow by several hundred dollars per month.
Adding it All Up
Increasing cash flow by $100 per month might not seem like a lot, but when you add it up over several years, that’s a significant chunk of change that can be used to pay down debt, acquire more investment properties, or increase your own personal income. Take cash flow seriously and your entire experience as a landlord will improve.